MINIMUM WAGE: COSTS AND BENEFITS
Minimum wage is the lowest permissible wage or remuneration that can be paid by an
employer to its employees as required by prevailing law in a given country. According to
Wikipedia, is the lowest hourly, daily or monthly remuneration that employers may legally
pay to workers. Meaning it is the least amount labours can sell their labour service
There have been divergent views about minimum wage fixing both within the
economics field of study and outside. The public policy of minimum wage fixing started in
1987 in New Zealand and 1986 in Australia with the aim of protecting the vulnerables in the
country and guaranteeing a minimum standard of living especially for the unskilled workers
and it has been adopted by over 90% of nation of the world but how well this policy has
achieved the aim is still a subject of intense debate over the years.
The most prevalent of these views is that of the neoclassical economics who through
their graphical analysis of the demand and supply of labour service opine that increasing the
minimum wage above the amount jointly determined by the interaction of demand and supply
i.e. equilibrium wage will cause unemployment. The reason for this assertion is that, at
minimum wage rate higher than that equilibriumly determined, more workers will be willing
to offer their labour services while employers will only be offering fewer jobs as a result of
the increase wage. They went further by asserting that the very group of people the
government is trying to protect will end up being the affected because the increase in labour
services offers experienced as a result of increase minimum wage will make firms to have
more choice and be more selective in employing and in the end, workers with the least skill
and experience don’t get the job. Unlike the unskilled workers, minimum wage doesn’t affect
workers with higher skills because it is in most cases lower than equilibrium wage. The
below graph is used to drive home the point.
As convincing the neoclassical model is, it experienced many criticisms from fellow
economists. Among which are: Professor Gary Fields of Cornell University who accused
neoclassical model of ambiguity and incorrect measurement of one-sector market without
recourse to a two-sector market.
Another criticism stern from the believe that if the vulnerable employees work in
firms producing products that are highly inelastic, employers can be forced to pay the
minimum wage while shifting the burden of the increase in wage on the consumers through
higher product prices. This was buttressed by the empirical study by David Card and Alan
Krueger in New Jersey, USA. In their study on fast food restaurants workers in New Jersey
and eastern Pennsylvania in 1992 after an increase in the minimum wage from $4.25 to $5.05
per hour which is (an 18.8% increase), they discovered that employment increase’s with the
increase in wage as against the popular or mainstream economics believe of a fall in
employment due to the wage increase. Though a contrary result was discovered sequel to a
subsequent finding by David Neumark and William Wascher to verify Card and Krueger
assertion. They found out that there was a decrease in employment following an increase in
From this contrasting view points, it will be worthwhile for government to consider
costs and benefits before making and imposing minimum wage so as to ensure that the cost of
job lost as a result of increased minimum wage exceeds the benefits that accrues from
increased income for the unskilled or poor labour.
Benefits of Minimum Wage
One of the major reasons in support of the minimum wage is the fact that, it helps the
most vulnerable, unskilled and poor of the societies increase their standard of living. This
long held notion has made successive governments to increase minimum wage at different
times so as to compensate for the falling standard of living as a result of increasing inflation
Another touted benefit which the government find favourable so to speak is the
believe that minimum wage will help reduce tax burden through decreases in the cost of
government social welfare programs to these lowly paid workers.
Minimum wage will also serve as an incentive to the unemployed to take-up jobs and
work harder. This is a resultant effect when unemployed people compare the minimum wage
to the government assistance. This incentive-benefit holds for nations paying unemployed
benefits but for nations like Nigeria without unemployment benefit, minimum wage will
induce them to be more frantic in getting a job since they are aware of the prevailing wage
Minimum wage also encourages increased consumption; this is as a result of more
money at the disposal of the low-income group that hardly save. This in-turn increases
demand and supply of goods, production; which benefits the economy at large.
Minimum wage can also increase employment. Aside from the empirical analysis of
Card and Krueger espoused above, employment can actually be created in the sense that,
some few workers in the minimum wage bracket can see increase in minimum wage as an
incentive for reduced work hours if he or she feels they have no other need to be met with the
increase in total wage thereby freeing up some hours of work which can then be taken up by
another unemployed or underemployed worker.
Despite these good reasons in support of minimum wage law, there are other reasons
discouraging its enactment or increase. These include:
Costs of Minimum Wage
The most wide-held cost associated with minimum wage is that, it causes
unemployment and making it difficult for people to find job. This span from the common
labour market rule such that firms will be demanding for fewer workers while workers are
willing to supply more of their labour services.
A related cost to the abovementioned is the fact that minimum wage laws affect the
manner in which workers are compensated in terms of more work effort and fringe benefits.
Workers that have many fringe benefits like subsidized health and child care, on the job
training, paid vacations, insurances etc inclusive in their pay package may have this reviewed
down or converted to cash to augment the difference between the former wage and the
legislated minimum wage. Employers may even eradicate or turn fulltime low-wage jobs into
part-time high-wage jobs.
Minimum wage causes cost-push inflation. This is one of the knowledge from high
school economics lessons. This type of inflation will occur when firms can shift the increase
in production cost as a result of increase wage to the final consumers.
Minimum wage will also bring about black marketeering of labour services especially
in firms, industries or nations where firms can get away with it.
Minimum wage is a less effective poverty reduction scheme compared to others like
basic income, guaranteed minimum income, refundable tax credit, collective bargaining
because it benefits some workers at the expense of the most vulnerable or poorest or least
productive in the society.
Minimum wage will also bring about movement of jobs from areas or nations of
higher labour cost to lower labour costs areas or nation. This was the case when many US
firms are opening up branches/subsidiaries in China to cater for major productions while
maintaining just administrative position in the US due to cheaper labour cost permissible in
China republic. It will also bring about rural-urban drift.
Lastly, it must be said that minimum wage usually affects the small businesses more
than their large counterpart which may affect their profit and sustainability.
From the foregoing, it’s evident and clear that minimum wage legislation is without its
negative effects or cost; even though the government meant well for the supposedly targets
(low-income workers), various analysis show the inherent problems with the legislation. So it
is recommended that government consider the cost and benefits of such policies or better still,
adopt other means like guaranteed minimum income, refundable tax credit, collective
bargaining, etc to protect or improve the standard of living of the poor in the society.
Fields, Gary S. (1994). "The Unemployment Effects of Minimum Wages". International
Journal of Manpower 15 (2): 74–81.